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Percentage of Spanish mortgages in default

The last 7 days have seen two bits of negative news come out of Spain relating to the housing and Spanish mortgage market.

The first statistic issued by the Bank of Spain relates to the level of loans in default or assessed as at risk. For yet another month running this has increased and now stands at 11.8% of all loans on the books. When compared to the years of 2005 and 2006 when a defaulted mortgage in Spain was almost unheard of and figures ran at below 1% of the book, the current level is a reflection of the size of the problem the Banks face.

When the world financial crisis began back in 2007/ 2008 Banks in Spain saw an increase in defaults but predominantly from the nonresident market. Many defaults at this point were driven by “investors” who had bought in Spain with mortgages linked to valuation not purchase price and had no embedded value in the property. As prices began to fall mortgagees with no personal cash to lose walked away.

This was closely followed by migrant workers predominately from South America who, encouraged by the banks in Spain, overstretched themselves and were the first to lose jobs as work contracted. Unable to sustain the payments without a job, no prospects, high interest rates and in negative equity they had no choice but to default.

What Spanish Banks had not anticipated was that the level of recession within Spain itself would as time went on force even the middle classes into default. Once seen as very low risk Spanish Nationals employed and in blue collar and white collar industries are now the very people forced into default.

At present the level of defaults is still kept somewhat contained by the fact the Euribor at 0.55% is the lowest level it has ever been since its inception. With the average historical granted margin above Euribor for Spanish nationals being between 0.75% to 1% it is only ridiculously low interest rates that are keeping some families afloat. If Euribors rise, as ultimately they will, and this is before Spain has sorted the current economic issues then 11.8% default may end up looking positively rosy.

The second piece of news issued today is that house prices continue to fall in Spain. There was another drop in house price for the last quarter of 2012. This drop in prices was despite the quarter seeing an increased number of sales due to buyers wanting to ensure they completed before the tax breaks on IVA for new builds and Capital gains tax reductions on resales bought before end of 2012 finished. Property prices it is announced are now in line with 2004 levels.

There are of course pockets that have held up better than others but across the board prices have now fallen to take into account 50% of the increases seen since 2002. For a number of people like myself who have been involved in the Spanish mortgage market and Spanish property market it has long been a belief that 2002 price levels must be reached before any recovery will happen.

The impact of Sareb ( Spanish Bad bank) has yet to be seen but will no doubt push prices down further as has been the experience in Ireland. It is definitely a good time to negotiate hard on price.